Ask an expert: RRSP contributions versus mortgage payments

Q: For a household where both partners are earning/contributing towards a guaranteed benefit pension, what is the recommendation between making RRSP contributions versus paying off a large mortgage faster? Which should we choose or weigh more heavily? A guaranteed benefit pension will put us into the highest marginal tax bracket upon retirement, so RRSP drawdowns will be taxed at the same marginal tax rate that we’re being taxed at today.

A: If you’re lucky enough to have extra cash to save at the end of the year, it’s tough to know where to put it — especially when you’re up against a daunting mortgage balance! Cynthia Kett, CA, CFP with Stewart & Kett Financial Advisors in Toronto says she usually advises clients to pay off their mortgages as soon as possible because the interest isn’t deductible. But she also recommends taking a balanced approach. Since the average mortgage contract lets you make an annual payment of up to 15 percent towards your principal, she recommends that you start by doing that — but be careful of making payments over that amount because your lender will probably impose a penalty.

If you have money leftover after doing this, then make an RRSP contribution, says Kett. As she explains, “While a taxpayer may have access to future registered pension plan benefits, they may not be enough to provide for the individual’s desired retirement lifestyle. Withdrawals from RRSPs/RRIFs can be used to supplement the cash flows from the pension.”

Keep in mind that as a taxpayer who is also a pension plan member you’re limited in the amount you can contribute to RRSPs by the Pension Adjustment that is reported on your annual T4, notes Kett. But that doesn’t mean you shouldn’t contribute to your RRSP, though, she explains: “At a minimum, RRSP contributions provide a current tax deduction and a deferral of tax until the funds are withdrawn from the RRSP/RRIF. If the taxpayers are in a higher marginal tax bracket during their working years than they will be during their retirement years, actual tax savings will be realized.”